Category Valuations

Price vs Value

Markets could not be more optimistic about the future. We see it with consumer sentiment, spending and in the stock market. For example, the S&P 500 surged to a new record high 6090 - far exceeding the most bullish of forecasts from 12 months ago. Will analysts be equally bullish about 2025? Post Trump's Nov 5th win - the bulls have found another gear. Trump has painted a compelling vision of a US economic resurgence built on three primary pillars: (i) lower taxes; (ii) sweeping deregulation and government reform; and (iii) an
emphasis on domestic production. Why does this have corporate America very excited?

Munger on Intelligent Investing

With markets at record highs - trading at very high valuations - I felt it was timely to revisit investing lessons from Charlie Munger. Sadly, Charlie passed away late last year - just shy of his 100th birthday. Whilst Charlie was an incredible investor - what I loved most was his ability to draw insights from many disciplines - which included the study of psychology, economics, physics, biology, history, architecture among other things. This enabled Charlie to develop a lattice of “mental models” to cut through difficult problems. Over the years, I've found Charlie's insights into investing, business and life not only rare but generally correct. What's more, they stand the test of time.

Tobin’s Q-Ratio Trades at Historical Highs

By just about any intrinsic measure - the stock market looks expensive. Ben Graham would be warning investors to heed caution. Now one of the more widely cited metrics is its forward price-to-earnings (PE) ratio - which trades at a very high 22x. However, another intrinsic measure is James Tobin's Q-Ratio - which now trades at a record high - exceeding that of the dot.com bust. And whilst not a great timing tool - it maintains a very reliable record of picking long-term secular highs.

Benjamin Graham’s ‘The Intelligent Investor’

Over the 14 years writing this blog - I've mentored many people on how to become a better investor. It's something I enjoy and a large part of why I've written this blog for so long. As part of that, one of the (many) books I highly recommend is Benjamin Graham's timeless classic "The Intelligent Investor". Unfortunately this is not a great book for those beginning their investing career. It's very dense and requires a lot of time and focus. I had the idea to write a 20-part summary of the book -- where each part corresponds to a chapter. And where practical - I produced up-to-date examples of his principles - simply to illustrate that nothing changes. And whilst someone will always say "it's different this time" - the truth is very rarely is it different.

The Trump Trade Stalls

Last week when assessing the surge in markets - I offered examples of how market (sector) dynamics shifted. Adding to that theme - I was not overly surprised to read how institutional investors are putting money to work. For example, Bank of America Corp.’s monthly survey of global fund managers indicates that Trump's decisive win is perceived as a potential turning point for investment strategies. And whilst that could be true - it pays to look at history... what can we gauge from Trump 1.0 (and the impact on markets).

Time to be Greedy or Fearful?

Warren Buffett is famous for saying "be fearful when others are greedy; and be greedy when they are fearful". Today the Oracle of Omaha sits on a record $325B in cash - a record for Buffett - and over 30% of his entire portfolio. Investor enthusiasm today is wildly optimistic about future growth and earnings post the election result. And whilst surging prices are a sign of confidence - markets are also notoriously fickle...

Stocks Losing Momentum

Are stocks starting to lose momentum? This week saw the S&P 500 reverse course - its first losing week since early September. Could there be more to come? My answer is yes - perhaps as much as 7-10%. However, it's a question of timing. Irrespective, paying 22x forward earnings is a higher-risk bet.

Why Buffett’s Mentor Would Reduce Risk

I've been re-reading "The Intelligent Investor" by Benjamin Graham. Warren Buffett called it "by far the best book on investing ever written" - crediting Graham with laying the foundation for his entire investment philosophy. The book taught me three powerful lessons: (1) above all else, investing is about protecting your capital; (2) investors should strive to pursue adequate and sustainable gains; and (3) it requires overcoming self-defeating behaviors (e.g., fear, greed and bias). The lessons could not be more timely given today's excessive valuations.

Not All Consumers Are Spending

Never underestimate the U.S. consumers want to spend. Well some of them at least. Last month's retail figures exceeded expectations - up 1.7% YoY in nominal terms (not adjusted for inflation). But here's the important point - these are nominal sales and only one month of data. One month is not overly helpful. When averaged over one quarter (which helps remove noise) - adjusted for inflation ( real terms) - and assessing the year-over-year change - growth is negative. And they have been negative in real terms for 9 straight quarters... this matters.

The Fiscal Tailwinds Helping Stocks

Will fewer rate cuts dampen the enthusiasm for stocks? It certainly hasn't to this point. And could higher bond yields impact stock valuations? So far the market is not bothered. These (and other) questions need to be weighed carefully with the S&P 500 trading ~21.5x forward earnings. And whilst the multiple is heavily skewed by the 'Mag 7' - 21.5x is far from cheap. What's more, from a historical perspective, paying a multiple above 20x offers investors a very low risk premium (e.g., with the risk free rate above 4.0%). But wait... what's to say stocks cannot rise further? We'll explore why they can...